DESCRIPTION OF S. 1514;
A BILL RELATING TO PRIVATE FOUNDA-
TION LEASING OF BUSINESS ASSETS
LISTED FOR A HEARING
SUBCOMMITTEE ON TAXATION AND
COMMITTEE ON FINANCE
ON JULY 25, 1977
Prepared for the Use of tpie
COMMITTEE ON FINANCE
BY THE STAFF OF THE
JOINT COMMITTEE ON TAXATION
JULY 22, 1977
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1977
The bill described in this pamphlet (S. 1514) has been scheduled by
the Subcommittee on Taxation and Debt Management of the Commit-
tee on Finance for a hearing on July 25, 1977. The bill relates to leas-
ing business assets by private foundation to a "disqualified person."
In connection with this hearing, the staff of the Joint Committee
on Taxation has prepared a description of the bill. The description
indicates the present law treatment, the issue involved, an explanation
of what the bill would do, the effective date of the bill, and the bill's
II. DESCRIPTION i
S. 1514 — Mr. Allen (for himself, Mr. Sparkman,
and Mr. Thurmond) i(
Private Foundation Leasing of Business Assets to ;
Disqualified Persons i
Under present law (sec. 4941 of the Internal Hevenue Code), pri-
vate foundations are generalh' prohibited from engaging in transact-
tions with disqualified persons. The prohibited acts (referred. to, as i
acts of '"self-dealing") include the "sale or exchange, or leasing, of j
property between a private foundation and a disqualified person'".
A "disqualified person" is defined to include anyone who is a "substan- ■
tial contributor" to the foundation. A "substantial contributor' in- !
eludes any person who has contributed more than $5,000 to the founda-
tion, if the total contributions from that person exceed 2 percent of the
total contributions received by the foundation. Once a person is a sub- \
stantial contributor, he remains so forever.
These provisions were added by the Tax Refonn Act of 1969. In
order to permit the orderly termination of arrangements existing in
1969 between private foundations and their disqualified persons, the
1969 Act (sec. 101(1) (2) (C) ) permitted then-existing leasing ar-
rangements to continue for up to 10 j^ears (through 1979), but only
so long as the foundation was not disadvantaged by the terms of the
lease. In addition, the Tax Eeform Act of 1976 amended the 1969 Act p
to allow these permitted transitional leases to be terminated by a sale
of the leased property by the foundation to disqualified persons. This
provision (see 101(1) (2) (F) of the 1969 Act) required that any such
sale must be completed before January 1, 1978.
Another provision of present law (sec. 4943) limits the percentage
of ownership which a foundation (and all its disqualified persons) s
can hold in any single business. In general, the combined business
ownership of a foundation and disqualified persons in anv business
may not exceed 20 percent (35 percent ownership by the foundation
and disqualified persons together is permitted where an unrelated
group is shown to be in control of the business) . These provisions Avere
also added by the Tax Reform Act of 1969, and include transitional
rules to allow foundations an adequate opportunity to dispose of their
then-existing holdings. Under tliese transitional rules, where a
foundation itself owned more than 95 percent of the voting stock in a
business in 1969, an initial transitional period of 20 years" (generally
through May 26, 1989) was provided for the foundation to reduce its
combined ownership (together with disqualified persons) to 50 per-
cent. Where lesser percentages were owned in 1969. transitional periods
of 10 and 15 years were provided. The Act also allowed foundations
to dispose of their excess holdings by sales to disqualified persons (sec.
101 (1) (2) (B) of the 1969 Act.)
In summary, the Congi-ess —
(1) provided restrictions on foundation involvement in ownership
of businesses and forbade completely continuing leasing relationships
with disqualified persons,
(2) provided transitional periods for disposing of existing busi-
nesses and terminating continuing relationships with disqualified
(3) permitted self-dealing sales only if they would facilitate the
disposition of excess business holdings or the termination of continu-
ing lease relationships.
The bill i:>repcnts scvci'al related issues :
First, whether there should be a permanent "gi'andfather clause"
for certain cases permitting indefinite continuation of a lease of prop-
erty between a private foundation and disqualified persons.
Second, whether the present law's 10-year period for terminating
leases in existence in 1969 should be extended an additional 10 years
Third, whether a private foundation should be permitted to sell such
leased property to a disqualified person at any time through the end
Ex2)lanation of the hill
The bill would permit, in certain circumstances, the indefinite con-
tinuation of a lease between a private foundation and a disqualified
person if the lease was in existence on October 9, 1969. Subsequent re-
newals of such a lease would not disqualify the lease for purj^oses of
this bill. This would be permitted only if the following conditions are
met: (1) the lessor is a corporation whose stock is wholly owned by
the private foundation; (2) the lease did not violate the limited re-
strictions on self-dealing in efi'ect prior to the Tax Reform Act of
1969 ; (3) the tenns of the least are at least as favorable to the private
foundation's wholly owned subsidiary as a lease entered into in an
arrn's length transaction would be; (4) the private foundation's sub-
sidiary corporation is not itself exempt from income tax; and (5) the
disqualified person (the lessee) became a disqualified person solely be-
cau^-e of contributions made to the private foundation before October
The bill would extend through December 31, 1989, a transitional
rule permitting the sale of stock by a private foundation to disquali-
fied persons even though the private foundation was not obligated to
dispose of that stock.
_ The bill would extend through December 31, 1989, the present tran-
sitional rule permitting the continuation of leases with disqualified
persons if those leases were in effect on October 9, 1969.
^ The bill would extend through December 31, 1989, the existing tran-
sitional rule permitting the sale of leased property that was subject
to tlie transitional rule described in the preceding paragraph.
The intended beneficiaries ^ of the bill are : Public Welfare .Fou.n^-^-
tion, Inc., a private foundation organized by Charles E. Marsh ; th«
taxable, wholly-owned subsidiaries of Public Welfare Foundation,
Inc. (The Spartanburg Herald and Journal, Inc., The Gadsden Times,
Inc., and The Tuscaloosa News, Inc.) ; and three newspaper operators
(Newspaper Management-Production, Inc., Gadsden Times Publish-
ing Corporation, and Tuscaloosa Newspapers, Inc.) who lease the
assets owned by Public Welfare Foundation, Inc's wholly-owned
The principal owners of the three operating companies are, re-
spectively, Phil Buchheit, Frank Halderman, Sr., and James B. Boone,
Jr. The newspapers operate in South Carolina and Alabama.
The staff understands that there are several alternative proposals
which may be presented in connection w4th the consideration of this
bill. In general, these proposals Avould limit the scope of the relief pro-
vided by the bill. Under one proposal, the bill would limit the exten-
sion of the transitional leases only to 1989 and only in the cia'cmn-
stances described above in the discussion of the provision of S. 1514
relating to the indefinite continuation of certain leases. Under a second
proposal, the definition of a '^substantial contributor"' would be
changed so that contributions made in lieu of rental payments on cer-
tain leases made prior to 1969 would not be taken into account in de-
ciding whether any person met tlie 2-percent and the $5,000 tests
under section 507 for purposes of determining whether that person
was a "substantial contributor."
The bill would take effect upon enactment.
The bill is not expected to have any effect cm the revenues.
^ The first provision in the bill, permitting an indefinite continuation of certain
leases, appears to be drafted so as to apply only to the situation presented by the
intended beneficiaries listed above. The second provision does not appear to relate
to that situation. The remaining two provisions apply across-the-board, and so
w^ould affect all private foundations with "grandfather clause" leases.